The Big Story Isn’t What You Think It Is

For the past six years, the mainstream has looked for the one thing that would cause markets to crash. They’ve come up with no end of ideas. Each has failed miserably. After a few wobbles here and there, the market hasn’t crashed.

That doesn’t mean that it won’t one day, but so far the mainstream has gotten it horribly wrong.

The one thing the mainstream has picked up on is the falling oil price. But even there they haven’t got it 100% right. As usual, they have only scratched at the surface. They aren’t looking at the layers beneath.

The key to understanding the falling oil price is that it’s not just about slowing economic growth or cheaper fuel at the petrol pump. It’s about understanding the knock-on effect of lower oil prices on the oil industry, on the economy, on consumer confidence, and on the rest of the financial markets.

If there’s one thing you should know about the markets and economies, it’s that everything is connected. The oil price can’t rise or fall by US$20–30 a barrel without it impacting every market sooner or later.

If the oil price stays below US$70 per barrel, or continues to fall even further, it will have a huge impact on the world’s markets. It will create an environment where stocks ultimately rise to a record high over the next four years before crashing in spectacular fashion.

That’s right, the downturn that happened on the ASX recently was nasty. But it wasn’t the big event. Nonetheless, that volatile period scared many investors out of the market as they thought it was the big crash. As the market settles and begins to rise, these same investors will realise their mistake and begin piling back into the market.

When they do, stocks will take off again.

That can seem hard to believe with all the scary headlines in the papers. But that’s how markets work. Sometimes they scare the heck out of investors. Investors panic and sell. Then they panic and buy back in again.

The result will be what I see as a four-year rally that will take stocks to a record high in 2018. And I don’t just mean a small advance from where the Dow Jones Industrial Average is today. I’m talking about the Dow rising another 50–100% from where it is today…and the Aussie index taking out a new high as it surges past the 2007 peak.

It could mean that the Aussie index doubles, perhaps triples from where it is today. Again, I know that may sound outrageous. It’s supposed to. Bull markets tend to begin when the market is in the throes of despair.

But you shouldn’t for a moment think that I’m cheerleading for stocks to go higher, or that I’m ignorant to the problems facing the world economy.

This isn’t about stocks doubling over the next four years and then continuing to rise forever. This is about the events that are happening today that will lead to an extraordinary stock rally and then a just as extraordinary bust.

China isn’t the only fraud

It’s not just the Aussie market and oil taking a beating — or gold, although it has rebounded recently.

The Chinese market continues to get roughed up. Despite China’s huge growth rate of 7.3%, the market still seems to be more focussed on the slowing growth rate rather than the aggregate growth.

It’s amazing. Even if China’s growth rate averages 5% in the years ahead, the economy will still double in size from where it is today in less than 15 years.

Just think about that for a second. As big as China’s economy is today, in 15 years it could be twice as big. At the moment China’s GDP is around US$10 trillion. The US economy’s GDP is around US$18 trillion. So if China grows at a 5% average growth over the next 15 years it will exceed the size of today’s US economy.

I don’t know about you, but to me that’s incredible.

And yet the mainstream can only focus on one thing, the potential for China’s economy to collapse. It explains this report in the Financial Times:

China’s foreign exchange regulator has uncovered $10bn in fake cross-border trade since April last year and has turned 15 cases over to police in a crackdown aimed at curbing hot money flows…

The gap between Chinese customs data on exports to Hong Kong and Hong Kong customs data on imports from China hit an all-time high of $28bn in March last year. The gap is viewed as a proxy for how much exporters are inflating their invoices. But by July this year, the gap had fallen to $9bn.

The outright inference is that dodgy things are going on with China’s statistics and trade numbers. I won’t argue with that. I’m almost certain things aren’t 100% above board.

However, let’s not fall into the trap of thinking China is the only economy that fudges numbers. Maybe you remember this report from 2012. But odds are you don’t, because very few media outlets reported on it at the time:

The mystery of the trainload of biodiesel that crossed back and forth across the Sarnia-Port Huron border without ever unloading its cargo, as reported by CBC News, has been solved.

CBC News received several tips after a recent story about a company shipping the same load of biodiesel back and forth by CN Rail at a cost of $2.6 million in the summer of 2010. It turns out the shipments were part of a deal by a Toronto-based company, which made several million dollars importing and exporting the fuel to exploit a loophole in a U.S. green energy program.

Well, what do you know? Import-export fraud. Only a fool would think this is the only case of import-export fraud crossing the US and Canadian borders. Doubtless there’s fraud crossing the US and Mexican border…and fraud with US and European, and US and Asian trade too.

Surely everyone must know now that any statistic that goes through the government ‘spin-cycle’ should be taken with a grain of salt. And lest anyone think that it’s only the dodgy foreigners who milk the numbers, take this from the ABC:

Federal Treasurer Joe Hockey says he wants answers to the problems the Australian Bureau of Statistics (ABS) has had with unemployment figures.

Mr Hockey, who is in the US to discuss Australia’s G20 agenda, said last month’s unemployment figures were “extraordinary”.

The rate was 6.1 per cent after jumping to a 12-year high of 6.4 per cent the previous month.

The ABS has now taken the rare step of abandoning seasonal adjustment for its latest employment data.

It’s no doubt a stretch to say that fraud is in play with the ABS numbers, but it goes to show you that you shouldn’t trust a set of numbers, whichever government stands behind them.

China has problems. There’s no doubt about that. A country can’t go through a once-in-a-century growth spurt without it causing some distortions in the economy. But also remember that on its way to becoming the world’s biggest economy, the United States went through a huge growth spurt too.

It too had troubles (including a civil war) and distortions.

The bottom line is when you’re investing based on looking at the big picture, it’s important to actually look at the big picture, and not let the mainstream daily news cycle divert you from the right course.


Kris Sayce
Publisher, Money Weekend

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Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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